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Many companies choose to establish holding companies, or “special purpose vehicles”, in jurisdictions, such as Hong Kong or Singapore, to hold their Chinese entity. Holding companies allow for an additional layer of distance between the Chinese subsidiary and parent company and can “ring-fence” the investment to an extent, protecting it from the potential risks and liabilities of the Chinese subsidiary. In the case that an investor wishes to sell their Chinese business, or introduce a third-party partner/shareholder into the structure, the administrative changes can also be done at the holding company level, rather than at the China level, where the regulatory environment is tougher and procedures are more time-consuming.
Given the comparatively sophisticated banking systems of Hong Kong and Singapore, establishing a holding company in either jurisdiction is a popular option for British companies wishing to hold their China-earned profits offshore. In this way, the profits can be re-invested into China if the need arises, or used to further expand operations elsewhere in Asia. Subject to the parent country’s anti-avoidance tax rules, this method is often used as a tax deferral mechanism for British companies who do not want to remit their China profits immediately back to the home country.
In addition, Hong Kong and Singapore holding companies present several tax advantages, including reduced withholding tax rates on the repatriation of profits and limiting tax exposure on capital gains.
This article was first published by Asia Briefing, which is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in in China, Hong Kong, Vietnam, Singapore, India, and Russia. Readers may write to the Head of UK and Ireland Business Development, and market entry advisor, Maria Kotova at UK.Ireland@dezshira.com